Column: Merck says it was “forced” to negotiate drug prices with Medicare. This is nonsense

No one really expected the pharmaceutical industry to sit back and accept when Congress authorized Medicare to begin negotiating the prices of the prescription drugs it buys for enrollees.

By that standard, the federal lawsuit filed on June 6 by major drugmaker Merck falls into the no-news category of man biting dog.

So too was an almost identical lawsuit filed on June 9 by the US Chamber of Commerce. And also threats from other drug companies to bring their own lawsuits.

That doesn’t mean the cases aren’t worth looking into. They are windows into the mind of Big Pharma, revealing the industry’s grotesque level of entitlement and its cynical exploitation of Americans’ desire for better health care to claim profits far beyond the level any thinking person would consider moral.

The lawsuits are so similar that they read like ChatGPT versions of each other. Both are compendiums of cunning evasion and feverish rhetoric, which is what corporate lawyers produce for a living. (Merck calls the program a dystopian parody of negotiation, which is a pretty elaborate swear word.)

Essentially, the lawsuits allege that the Medicare negotiation program, established by the Inflation Reduction Act, or IRA, signed into August by President Biden is so weighted in Medicare’s favor that its illegal and unconstitutional amounts to extortion, Merck says .

Big Pharma claims through these lawsuits it was forced to bow to price cuts imposed by unelected bureaucrats at the Department of Health and Human Services for its most popular prescription drugs. Merck’s side of the argument is that by forcing it to negotiate with Medicare to sell its drugs, the government is engaging in an unconstitutional takeover of Merck’s private property without just compensation.

The fundamental flaw in this argument, says Nicholas Bagley, an expert in health and administrative law at the University of Michigan, is that Merck has no constitutional right to sell its drugs to the government at the price Merck would prefer. The government isn’t taking anything that Merck doesn’t choose to give it.

By explaining why it’s suing the government, Merck produces a parade of horrific consequences that it says will be the fallout from federal regulation of drug prices. We believe this program will negatively impact biopharmaceutical innovation and industries work to develop life-saving and life-changing innovations. In turn, it will have devastating consequences for millions of needy patients.

We’ve heard all of this before. Every industry always claims that every regulatory initiative will hinder innovation and increase costs for consumers and harm millions of innocent people. This is just PR persiflage and you can safely ignore it.

Merck’s profit margin has averaged about 25% over the past two years. In fact, it reaped more profits in that time frame ($27.5 billion) than it spent on R&D ($25.8 billion); in 2021 and 2022 the company also spent nearly $16 billion on stock buybacks and dividends. In other words, it has more than enough spare cash to develop life-saving and life-changing innovations.

Let’s take a further look at the arguments from the industry. But first, here’s how the trading program works.

Starting in September, Health and Human Services will compile a list of 10 brand-name and non-generic drugs from the list of those on which Medicare spends the most; 30 more drugs will be added to the list in 2025 and 2026, and more in subsequent years. Companies have 30 days after selection to agree to negotiate a price with Medicare, which must be at least 25% to 60% off the average price of drugs on the nonfederal market (amount varies by drug) . For this first round, the negotiation process will last until July 2024, with prices taking effect in 2026.

Companies that refuse to participate in this process or reject Medicares’ designation of a fair price will be subject to an excise tax starting at 65% of drug sales in the United States and increasing to 95% over time.

Merck appears to resent the fact that the government hasn’t taken a more direct approach to drug pricing for Medicare. Congress simply could have allowed HHS to specify a maximum price it would pay for a covered drug, or to use its natural leverage to get favorable prices, his lawsuit says. But those options would have allowed manufacturers to walk off the table. Because the loopholes would create a political backlash, Merck says, the government chose a different path.

A couple of points on this.

First, do you really believe that Merck and the rest of Big Pharma would have agreed to price caps on Medicare drugs without filing lawsuits like this? Me niether. Of course, if the pharmaceutical industry lobby hadn’t made it known in words and in cash that they would oppose any such move, that would have been a long time ago.

Second, producers are effectively enabled by the new system to walk away, just as Merck wants. The mandate for negotiations and a steep excise tax penalty for refusal apply only to drug companies that have a relationship with Medicare or Medicaid. Those who choose not to sell any of their drugs to the programs are exempt.

But this is their choice. No one is forcing Merck to participate in Medicare and Medicaid, as Bagley points out: To date, it has participated because selling drugs to Medicare and Medicaid is so profitable. … Merck will undoubtedly continue to participate is still so profitable! but he just wants to be paid more.

To put it another way, Health and Human Services AND employing its natural leverage to obtain favorable prices just as Merck says it should.

It is true that under the negotiation program drug companies cannot immediately withdraw from Medicare. Bagley told me via email that while this is a real flaw, the remedy is to let the drug companies back out immediately or give them a little more time to continue charging full price. But that’s not an argument to invalidate the IRA altogether, he says.

Merck was likely the first drug company to walk out of the gate with a lawsuit because it knows that two of its best-selling drugs will likely go through the negotiation program in its first few rounds. They are Keytruda, a cancer immunotherapy drug that is its top seller, and Januvia, a diabetes treatment that ranks fourth. Together, these two drugs have accounted for about 45 percent of Mercks’ sales over the past two years, producing profits the company is desperate to protect.

That’s why the pharmaceutical industry is targeting the first significant effort by the US government to impose sanity on drug prices. It’s worth examining just how much drug companies get away with through the US drug pricing system (which isn’t a system at all). According to the latest available data, the list price of Keytruda treatment in Britain is $107,000 a year; in Canada, its $152,000; and in France, $78,000.

In the US, it’s $189,000.

Those other countries have robust systems for government-set price caps and, yes, negotiations with drugmakers. Outside of the Department of Veterans Affairs, we have nothing like this in the United States. Now that Congress has created one, drug companies are squealing like pigs being led to the slaughterhouse.

At the heart of the lawsuits between Merck and the Chamber of Commerce is a dispute over how to calculate the fair price of prescription drugs. Merck says Health and Human Services wants to impose its number and that the negotiations are a sham.

But is not so. The IRA requires health and human services to consider a number of criteria, such as drug makers’ research and development costs, manufacturing costs, how long patent rights remain, and the drug’s effectiveness relative to alternative therapies . Nothing stops a pharmaceutical company from inundating health and human services with evidence on all of these points, much of which will weigh in favor of a higher price for Keytruda.

The law also requires health and human services to consider the government’s financial contribution to drug development. This could weigh in the opposite direction because direct and indirect government funding contributes significantly to the development of most of the drugs that have reached the market in recent decades. They include Keytruda, which was the subject of a 2014 settlement in which Merck paid more than $625 million to settle allegations that the drug infringed on existing patents that were themselves the product of government-funded research.

For all its hoopla and pranks, Merck knows that selling drugs to Medicare, the nation’s largest healthcare customer, is too good a deal to turn down. Even if health and human services drive tough business, it’s not a good bet that they will impact pharmaceutical industry bottom lines very deeply. To Merck and the chamber, these lawsuits appear to be just a way to fire a shot across the health and human services arc warning that it should face the negotiation process judiciously. Whether the courts will consider the lawsuits is now an open question, since the negotiation process hasn’t even started, so no one can claim to have been burned just yet.

Buried in Merck’s lawsuit is a curious self-inflicted wound, a reference to a recent poll that found 79 percent of Americans favor allowing the government to negotiate lower drug prices.

This is the political tide Merck is trying to stem. Forget all the gasping in his lawsuit about constitutional rights and governments commandeering the valiant work of drug researchers. It’s all about the money. Merck and the rest of Big Pharma just want to keep every penny they can, their patients be damned.